from my tiny little insignificant blog
A Minimum Wage Increase Doesn’t Cause Inflation and Unemployment – IF It’s a Living Wage
The United States and the globalized world are suffering a variety of economic problems, not the least of which are the unemployment and underemployment problems which threaten to destabilize the U.S. economy. But with a real threat like unemployment or underemployment creeping in the shadows, people tend to look for courses of action that provide a false sense of security. They start to cringe and scold when they see collective bargaining and union action to increase wages or benefits, they fear minimum wage increases because they believe a low-paying job is better than no job at all, and bowing and groveling on the floor, they offer tax cuts and deregulation to big businesses and the wealthy in the hopes that their efforts to appease them will be rewarded with a decrease in the rate of negative job growth. But these measures will not dispel the menace of unemployment, and they will only worsen the economic problems facing the nation in other important areas. I will address these areas shortly.
My basic argument is this: Employers hire and maintain employees if and when they need them. If employees are an item on the market, having a sale won’t help if nobody is looking to invest in this commodity. An employer will invest in an employee’s services when and only when the employer needs these services, regardless of the current market price of these services. Human labor is a resource that businesses will pay the lowest possible price for when they need it, but will not buy more of simply because the price is low. Of course, this is a general rule, and there may be other factors to take into account, for example in some cases a business looking at the prospect of expansion may take a higher labor cost into account when analyzing the investment risk versus the possible return, but as a general rule, businesses will always need employees regardless of the cost. The peripheral benefits of raising the minimum wage, especially of raising it to the level of a living wage and keeping it there, outweigh the risks and negative effects of doing so.
Let’s examine the economic situation in the United States on a broad level. With the recent deregulation of the financial sector, with no limits on leverage allowing institutions to make bets representing dollar amounts that are dozens of times their net worth, institutions which are “too big to fail”, and a host of other systemic corrupting influences, the recent collapse of the financial sector and the reverberations throughout the entire economic system shouldn’t have been a surprise, at least not to economists. But this is just the tip of the iceberg, and the economic engine of the United States is running on empty.
It sort of depends on what your vision of an ideal economy for the United States would be. Without addressing other possibilities, there are two main directions the U.S. economy can move in: an economy driven by a strong middle class, or an economy more resembling third world nations, where an extremely wealthy oligarchy towers socially, economically, and politically above the impoverished masses. I know which one I consider to be my American dream.
But the economy we have today is an unsustainable mixture of the two. Wealth is gaining wealth, and the separation between rich and poor is growing fast. The middle class is sustained by credit, with an ever increasing number of Americans one medical problem away from financial ruin, yet working hard to maintain a middle class standard of living. Of course, poverty by way of medical issues is a purely American demon, as any comparably industrialized nation has some form of health care access for all of its citizens and controls on costs of medication, but in the globalized economy, other economic problems could spread throughout the world, especially if all nations start letting multinational corporations set the rules and compete amongst eachother to attract the employment opportunities they represent.
Class warfare is already happening, and if you’re in the middle class, you’re losing. Redistribution of wealth has been happening for decades, and you didn’t see it right under your nose. Ever since the efforts of the New Deal made it possible for more Americans to get an education, get on the electrical grid, and get jobs and learn job skills, as well as earn a minimum wage, the middle class has grown wealthy and comfortable, and have not participated in preventing the gradual rollback of the systems and precedents which made their success possible. The net effect is that the wealth of the middle class is being transferred to the wealthy, with stagnant wages, increased precarious employment and underemployment, and a general lack of opportunity forcing the middle class to fall back on credit and their safety nets to maintain their lifestyle. Each generation sees less opportunity than their parents, and spend more of their parents’ savings before they can successfully leave the nest and become fully independent, if they ever do. With each generation becoming more and more dependent on the wealth of their predecessors, how long will it take for us to spend every penny we earned through the New Deal?
The minimum wage, or more broadly and more importantly, wages which lie anywhere between the minimum wage and a living wage, are not just for unskilled laborers anymore. They’re for vast and growing sectors of the economy, including management positions and positions which require skills, education, general knowledge, and adherence to demanding standards of quality of service. With the cost of housing, transportation, food, health insurance, and other necessities in the United States, even if you refrain from gadgets and gizmos and luxury items, the cost of living in the U.S. is far ahead of the minimum wage. Factor in that during the majority of the living wage’s lifespan, most families with children survived on a single income, and you will realize how far behind we are. The reason so many families have to live on multiple incomes, with each wage earner working multiple jobs in many cases, is that even skilled and educated workers can end up working in jobs that pay less than a living wage year after year.
Allowing the minimum wage to slip so far has been a major mistake, if the goal is to maintain a strong middle-class economy where the majority of the citizenry live in relative wealth and comfort. I would go so far as to say that a minimum wage which is constantly adjusted to the cost of living, erring on the side of being slightly above the minimal cost of living, can provide the kind of basis for a sound economy that no other gold standard could rival.
The fact that such a huge gap has grown between the minimum wage and the cost of living is the primary reason that switching to a living-wage economy could have immediate negative repercussions, a sudden shock to the economy, and this is something that should have been avoided. But what’s done is done, and it’s time to look forward. We need to enact the kind of wage changes necessary while finding ways to mitigate the immediate effect on the economy. An automatic system to raise the minimum wage based on a suitable percentage of an appropriate cost of living index or a commission appointed to enact changes in the minimum wage based on changes in cost of living and other appropriate factors is a proposal that conventional wisdom will tell you is crazy, but I think it makes perfect sense.
I believe I’ve already made a case against the idea that it would cause massive unemployment. The bottom line is that businesses need employees, and efficiency is always a factor in their decision-making process, regardless of how much it costs to hire. The only hindrance this could cause to employment within the nation that institutes such a law would be if businesses can’t afford to expand because of the additional cost, if businesses simply break under the additional cost and go bankrupt, and if businesses move their operations overseas.
But these are primarily short-term issues. In the long term, I believe the net effect would be job growth, not increased unemployment. Scheduled minimum wage increases over a few years could be part of the original legislation, giving businesses time to adjust. Temporary help could be given to businesses that need it, and methods could be implemented to incentivize loans for these businesses, or government loans with little or no interest could be offered for businesses who need them to keep running during the initial switch.
The problem of businesses not being able to expand or grow because of the cost of hiring new employees will be a temporary problem. In a few years, the economy will adjust to the new pricing schemes necessary to make this work, and while profit margins or CEO pay may suffer to a degree, the positive effects on the consumer base will offer a huge opportunity for the businesses that are in a position to take advantage of it. For example, if, in the most extreme case, a living wage is instituted on a level which makes it possible for a single income to cover the cost of living for a married couple with children, any single, married without children, or two-income households will have an influx of savings and disposable income, giving them the kind of buying power that will make them attractive for providers of products and services of all kinds.
And as for the threat of outsourcing, that sword of Damocles has already fallen. Similarly to my previous argument, any jobs which can be outsourced already have been. And trying to compete in terms of labor cost on an international market is a losing game. We simply cannot compete with sweatshop labor prices, nor should we try. In fact, we should be limiting imports of products which are manufactured by workers who are not paid their local equivalent of a living wage. If we try to compete with sweatshop prices, then we must abolish the minimum wage altogether and open sweatshops in the United States, and everyone’s standard of living will suffer if we play that game.
I would, of course, advocate that a single income should cover the bare cost of living for a small family, at least as a long-term goal. A good start would be a living wage of at least 1.5 incomes being enough to cover a family’s cost of living, because a two-income household should be able to save, invest, and have disposable income. An excellent way to boost the economy and create more jobs that can’t be outsourced is to make sure that after paying their dues working for someone else, people have enough money to start considering starting their own business. Not only would this lead to more small businesses and more jobs, but it would give employers an extra incentive to treat their workers well and give them competitive wages, because not only would they have to compete with other employers to keep their most valued workers, they would have to compete with the fact that their employees would be able to start their own businesses. Employers would have to give them a reason to stay.
Most importantly, a minimum wage adjusted to the cost of living would allow more families to rebuild their safety net. No longer would so many Americans be one lost paycheck or one unexpected expense away from bankruptcy, or drowning in credit card debt and praying that their home equity doesn’t disappear when a housing bubble pops. Future generations will have a smoother transition into independence.
Now, some of these benefits will not occur if the raising of a minimum wage does not reach the level of a living wage. Any minimum wage increase that does not reach the cost of living will not help rebuild safety nets. I’m not saying closing the gap isn’t worthwhile if it’s all that can be done at a given time, but only a full shift to a self-adjusting living wage can not only improve the situation of the poorest workers, but lead to the kind of economic changes that create more jobs and more opportunities for everyone.
And if job losses or economic crises do occur, people will be better prepared for them. If they get laid off, the smarter ones will have some money saved up to carry them through until they find a new job, or their safety net will be better prepared to help them. Fewer people will be thrown into total poverty, saving the public from having to bail them out through public programs. More people will be in a position to pay into the tax system, easing the tax burden for everyone. And that additional job growth and, independently of that, the additional ability to contribute of those who are working, will pay for the costs of helping small businesses navigate the economic shift. This is the kind of win-win solution that can build a real economic foundation for America to build upon.
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